The Effects of Political Competition on the Funding and Generosity of Public-Sector Pension Plans

66 Pages Posted: 22 Jul 2015 Last revised: 2 Feb 2016

See all articles by Sutirtha Bagchi

Sutirtha Bagchi

Villanova University - School of Business - Economics

Date Written: January 7, 2016

Abstract

In politically competitive jurisdictions, there can be strong electoral incentives to underfund public pensions in order to keep current taxes low. I examine this hypothesis using panel data for 2,000 municipal pension plans from Pennsylvania. The results suggest that as a municipality becomes more politically competitive, it tends to have pension plans that are less funded, more generous, and use higher interest rates at which to discount future actuarial liabilities. An increase in the level of political competition by one standard deviation leads to a decline in the actuarial funded ratio of about 7-10 percent, an increase in the annual average retirement benefits of about $470-620 per retiree, and an increase in the interest rate for discounting actuarial liabilities of about 5 basis points. Instrumental Variable (IV) estimates generated using demographic characteristics of the population as instruments corroborate these findings.

Keywords: Public-sector pensions, political competition, unfunded liabilities, actuarial funded ratio

JEL Classification: H75, J45

Suggested Citation

Bagchi, Sutirtha, The Effects of Political Competition on the Funding and Generosity of Public-Sector Pension Plans (January 7, 2016). Available at SSRN: https://ssrn.com/abstract=2633565 or http://dx.doi.org/10.2139/ssrn.2633565

Sutirtha Bagchi (Contact Author)

Villanova University - School of Business - Economics ( email )

United States

HOME PAGE: https://sites.google.com/site/sutirthabagchi/

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